The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 2023. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.
For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.
What is the Employee Retention Credit? State Conformity Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features & Benefits
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The percentage and limit will vary depending on when the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. State Conformity Employee Retention Credit
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can request an advance payment by submitting Form 7200.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
- The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses qualify for ERC despite business suspensions or revenue decreases.
A government order may suspend a business, or even partially suspend it.
- The order limits commerce, travel, or group meetings due to COVID-19
- The order affects the operations of the business or organization
- This order is applicable to any calendar quarter of 2020 or 2021
Some examples of government orders that can cause a business suspension are:
- Stay-athome orders restrict non-essential enterprises from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The nature and scope of the order and how it affects the operations of the business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The extent and severity of the impact of the order on the revenues and expenses of the business
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts consist of:
- Sales of goods and Services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions are gifts, donations and grants State Conformity Employee Retention Credit
- Membership dues
- Gross income from trades or businesses
To compare gross revenues for different quarters an employer can use:
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A recovery startup is a business:
- Start any new business or occupation after February 15, 2019,
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum credit amount per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC’s main influences are:
- How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- How much the employer paid to each employee and their health insurance during the pandemic
The employer has to fill out some forms and send them to the IRS to claim the ERC. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will review the forms and pay the money back to the employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.
ERCs are not available forever. The ERC began in March 2020, and it will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. State Conformity Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. Credit amounts vary depending on when they are claimed. The table below summarizes key differences and features of the ERCs for each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
The Number of Employees
The number of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The table below summarizes the rules and thresholds for determining employer size in each time period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Earnings and Costs of Health Insurance
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The following table provides a summary of the rules for different scenarios. State Conformity Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim and Report Credit
The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 allows the employer to do:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. State Conformity Employee Retention Credit
- Carry forward any excess credits to future quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f to declare any advance payments received from the IRS.
- If you need to receive an advance payment, use Line 24.
- You can report excess credit on Line 25 for the following quarters.
- Sign Form 941, date it and attach any documents or schedules that you wish to include.
Tips and resources on how to complete Form 941 include:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- Need clarification? Contact an IRS agent or tax professional.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use the Form 941 X to: State Conformity Employee Retention Credit
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to claim any additional credit for each quarter.
- Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
- Sign and date Form 941, and attach any supporting documentation or schedules
Tips and resources on how to complete Form 941 X include:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted State Conformity Employee Retention Credit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- You can also contact a tax expert or the IRS for clarification or additional assistance.
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. The employer can still file Form 941 if they have deposited their taxes on time. After the end of the quarterly period. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. State Conformity Employee Retention Credit
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.
Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.
The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs can be a huge help to your organization or business and its employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading. Stay safe.
State Conformity Employee Retention Credit
What is the ERC?
Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Is everyone eligible for the ERC?
Not everyone is eligible for the ERC. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
More details are available above. But here are some of the highlights.
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
How much is the ERC?
The amount ERC received by a business or organization will depend upon several factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. If you want a more detailed explanation, read the above article.
How to claim your ERC?
To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
What is the deadline for submitting the ERC forms?
The deadlines for filing Forms 941 and 941-X are different.
The deadline for Form 941 is usually the last day in the month after the end of every quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.